Thursday, October 13, 2005

This week, for the first time in its 20-year history, Macquarie Bank held a board meeting in London, the first outside Australia, its home country. Allan Moss, Macquarie's chief executive, says that nothing should be read into the timing: the meeting had been planned for more than a year, and the bank owns lots of assets in Britain. Others are not so sure. In August, the bank said that it might bid for the London Stock Exchange, already the subject of attention from other European bourses. Rumours about the preparation of such a bid have been flying about since.

The idea fits Macquarie's unusual style. As well as offering conventional investment banking, fund-management and retail financial advice, the bank has been an eager acquirer, via funds and trusts, of firms and infrastructure. In Britain alone it made a string of purchases in the past 18 months, from a ferry operator to a gas distributor, to add to the M6 toll road and the two airports it already owned.

Macquarie has grown from two offices, in Sydney and Melbourne, into the manager of a portfolio worth A$89 billion ($67 billion) and the employer of 7,000 people in 23 countries. In the year to the end of March, it made a profit of A$823m, an increase of 67%, and the value of its portfolio went up by more than 40%. Its income outside Australia rose by 83%, and now accounts for almost 40% of the total.

The action rolls on. On October 4th Macquarie launched a new fund, to invest in media assets. It will be financed by an initial public offering that is planned to raise A$927m-996m. The stock market likes what it sees: the share price is almost 60% higher than in mid-April. This helps to explain why Mr Moss is Australia's longest-serving chief executive. Having clocked up 12 years in a land where the average boss lasts for about four, he reckons: “I'm probably approaching 250 years old.”

A rum choice of name

Macquarie was formed in 1985 from the Australian arm of Hill Samuel, a British merchant bank. It was listed on the Australian stock exchange 11 years later. The original team included both Mr Moss and David Clarke, now the executive chairman. They trawled history books to name their bank after a great Australian. “Remarkably,” says Mr Moss, “quite a number are not necessarily the sorts of people whom you would choose for the name of a bank, actually.” They settled on Lachlan Macquarie, an early 19th-century governor who brought order to the chaos of colonial Sydney, in which rum was often used as currency. The governor bought Spanish silver dollars, punched out the middles and thereby created two new coins: the punched-out bit and one with a hole, which became the bank's symbol. “It was the first Australian financial innovation,” says Mr Moss. “it was of great benefit to the community and it made money. It's a symbol we feel proud of.”

The bank is making money too—not least for its bosses. In 2004-05, Macquarie's top seven executives were paid a total of A$89m; Mr Moss's share was A$18.5m, mainly from “performance-related” fees added to his salary, making him Australia's highest-paid chief executive. The fees, he says, are “market rates for the work we do”. Macquarie, he notes, has raised A$17 billion in venture capital in the past 18 months, half at home and half abroad. Clearly, he says, clients have confidence in Macquarie's business model. A key strategic theme is “not being constrained by conventional views of what investment banks should do”.

This unconventional model took shape about ten years ago, when Macquarie won a tender to build the M2 toll road in Sydney by floating a company that would own the road; original investors have reaped a ten-fold return. Thereafter, Macquarie set up a series of listed funds covering toll roads, airports and communications: the media fund is the latest addition. Like its parcel of international property trusts, all have done well. The assets they own or manage range from a toll road in Chicago to a power company in Canada. The bank's image took a battering three years ago, after it paid almost A$6 billion for Sydney airport, when Virgin Blue, a low-cost carrier, accused it of reneging on an access deal. Virgin launched billboard advertisements with the bold slogan “Macquarie: what a bunch of bankers,” before the dispute was settled.

The common theme behind this disparate group of assets, says Mr Moss, is finding businesses that “have some protection from the full rigours of competition.” This means buying shopping centres, industrial properties, airports, toll roads and broadcast towers in locations that pretty much have the field to themselves: as more people want to use them, their revenue streams will keep on growing.

So far, this approach has worked exceptionally well. Could it come unstuck—because of a global downturn, say, or, as some critics suggest, simple hubris? Mr Moss counters that risk management is his most important job. Macquarie, he says, continually estimates what would happen if markets fell by as much as 40% in a day, and makes sure it is confident the bank would still be in good shape at the end of such a catastrophe. Such methods will continue to be needed if it is to steer clear of the grand visions that have sunk more flamboyant high-flyers.